PROJECT  WORKBOOK  

“Talk  is  cheap.  Time  for  ac;on”  

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Your  data…  

¨  Data  Packet  ¤  Page  1:  HDS  (Bloomberg)  –  Top  17  stockholders  ¤  Page  2:  Beta  (Bloomberg)  –  2  year  weekly  return  beta  ¤  Pages  3-­‐6:  DES  (Bloomberg)  –  4  page  descrip;on  of  your  company  ¤  Page  7:  FA  -­‐  Summary  financial  informa;on  for  your  company  ¤  Page  8  (and  more):  DDIS:  Debt  due  table  (with  maturi;es)  

¨  Checklist  before  you  start  ¤  What  country  is  your  company  incorporated  in?  ¤  What  currency  are  the  financial  statements  in?  (Not  necessarily  in  the  

local  currency)  ¤  What  currency  is  your  market  capitaliza;on  and  stock  price  stated  in?  

(May  not  match  the  currency  of  the  financial  statements)  ¤  What  was  the  most  recent  fiscal  year?  (For  most  of  your  companies,  it  

will  be  a  year  ending  December…  but  some  may  have  other  year  ends)  

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Percent of outstanding shares in company"

Source for data: Will vary across markets. 13F is SEC filing for US mutual/pension funds"

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Corporate  Governance:  Assessing  where  the  power  lies  and  poten;al  conflicts  of  interest  

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1.  Ins;tu;onal  Default  5!

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2.  Self  Holdings?  6!

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3.  The  Government  Influence?    7!

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4.  Different  vo;ng  rights?    8!

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5.  Family  Group  Companies  9!

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6.  Founders  hang  on…  10!

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7.  Corporate  Cross  Holdings    11!

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8.  Ac;vist  investors  12!

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The  marginal  investor  in  your  firm  is….  13!

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Risk  free  rate:  Major  Currency  Government  Bonds  

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The  Full  Story:  Local  Currency  Government  Bonds  

Country   Government  bond  rate   Country   Government  bond  rate  Argen;ne  Peso   12.24%   Lithuanian  Litas   3.80%  Australian  Dollar   4.28%   Malaysian  Ringgit   4.15%  Brazilian  Reais   13.21%   Mexican  Peso   6.45%  Bri;sh  Pound   3.03%   New  Zealand  $   4.78%  Bulgarian  Lev   3.60%   Nigerian  Naira   13.26%  Canadian  dollar   2.77%   Norwegian  Krone   2.97%  Chilean  Peso   5.22%   Pakistani  Rupee   11.50%  Chinese  Remimbi   4.64%   Peruvian  Sul   6.76%  Colombian  Peso   6.83%   Phillipine  Peso   3.80%  Croa;an  Kuna   5.21%   Polish  Zloty   4.35%  Czech  Koruna   2.35%   Romanian  Leu   5.43%  Danish  Krone   1.99%   Russian  Rouble   7.71%  Dutch  Guilder   2.23%   Singapore  $   2.56%  Euro   1.94%   South  African  Rand   7.91%  Hong  Kong  $   2.35%   Swedish  Krona   2.52%  Hungarian  Forint   5.71%   Swiss  Franc   1.09%  icelandic  Krona   3.47%   Taiwanese  $   1.70%  Indian  Rupee   8.83%   Thai  Baht   3.91%  Indonesian  Rupiah   8.44%   Turkish  Lira   10.27%  Israeli  Shekel   3.65%   US  $   3.04%  Japanese  Yen   0.74%   Venezuelan  Bolivar   14.05%  Kenyan  Shilling   12.60%   Vietnamese  Dong   8.95%  

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Approach  1:  Default  spread  from  Government  Bonds  

The Mechanics!Brazil 2020 Bond: 3.93%"US 2020 T.Bond: 2.43%"Spread:" " 1.50%"

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Approach  2:  CDS  Spreads:  January  2014  

Country  Moody's  local  

currency  10-­‐year  CDS  

Country  Moody's  local  

currency  10-­‐year  CDS  

Country  Moody's  local  

currency  10-­‐year  CDS  

Abu  Dhabi   Aa2   1.00%   Iceland   Baa3   2.19%   Poland   A2   1.28%  Argen;na   B3   14.73%   India   Baa3   3.51%   Portugal   Ba3   4.03%  Australia   Aaa   0.70%   Indonesia   Baa3   3.19%   Qatar   Aa2   1.03%  Austria   Aaa   0.74%   Ireland   Ba1   1.69%   Romania   Baa3   2.61%  Bahrain   Baa1   2.97%   Israel   A1   1.53%   Russia   Baa1   2.21%  Belgium   Aa3   0.97%   Italy   Baa2   2.11%   Saudi  Arabia   Aa3   1.09%  Brazil   Baa2   2.53%   Japan   Aa3   0.79%   Senegal   B1   0.90%  Bulgaria   Baa2   1.89%   Kazakhstan   Baa2   2.26%   Slovakia   A2   1.30%  Chile   Aa3   1.08%   Korea   Aa3   0.97%   Slovenia   Ba1   2.75%  China   Aa3   1.33%   Latvia   Baa2   1.69%   South  Africa   Baa1   2.75%  Colombia   Baa3   1.74%   Lebanon   B1   4.38%   Spain   Baa3   1.96%  Costa  Rica   Baa3   3.43%   Lithuania   Baa1   1.77%   Sweden   Aaa   0.39%  Croa;a   Ba1   3.97%   Malaysia   A3   1.65%   Switzerland   Aaa   0.56%  Czech  Republic   A1   1.07%   Mexico   Baa1   1.49%   Thailand   Baa1   1.86%  Denmark   Aaa   0.54%   Morocco   Ba1   2.54%   Tunisia   Ba2   4.57%  Estonia   A1   0.89%   Netherlands   Aaa   0.74%   Turkey   Baa3   2.89%  Finland   Aaa   0.48%   New  Zealand   Aaa   0.80%   United  Arab  Emirates   Aa2   2.88%  France   Aa1   1.06%   Norway   Aaa   0.29%   United  Kingdom   Aa1   0.57%  Germany   Aaa   0.56%   Panama   Baa2   1.64%   United  States  of  America   Aaa   0.46%  Hong  Kong   Aa1   0.91%   Peru   Baa2   1.88%   Venezuela   B1   10.80%  Hungary   Ba1   3.08%   Philippines   Ba1   1.81%   Vietnam   B2   3.35%  

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18!

Approach  3:  Sovereign  Ra;ng-­‐based  default  spreads  

Sovereign Rating!

Default Spread over riskfree!

Aaa   0.00%  Aa1   0.40%  Aa2   0.50%  Aa3   0.60%  A1   0.70%  A2   0.85%  A3   1.20%  Baa1   1.60%  Baa2   1.90%  Baa3   2.20%  Ba1   2.50%  Ba2   3.00%  Ba3   3.60%  B1   4.50%  B2   5.50%  B3   6.50%  Caa1   7.50%  Caa2   9.00%  Caa3   10.00%  

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Geong  to  a  risk  free  rate  in  a  currency:  Example  

¨  The  Brazilian  government  bond  rate  in  nominal  reais  in  January  2014  was  13.21%.  To  get  to  a  riskfree  rate  in  nominal  reais,  we  can  use  one  of  three  approaches.  ¨  Approach  1:  Government  Bond  spread  

¤  The  2020  Brazil  bond,  denominated  in  US  dollars,  has  a  spread  of  1.50%  over  the  US  treasury  bond  rate.  

¤  Riskfree  rate  in  $R  =  13.21%  -­‐  1.50%%  =  11.71%  ¨  Approach  2:  The  CDS  Spread  

¤  The  CDS  spread  for  Brazil  on  January  1,  2014  was  2.53%.    ¤  Riskfree  rate  in  $R  =  13.21%  -­‐  2.53%  =  10.68%  

¨  Approach  3:  The  Ra;ng  based  spread  ¤  Brazil  has  a  Baa2  local  currency  ra;ng  from  Moody’s.  The  default  

spread  for  that  ra;ng  is  1.90%  ¤  Riskfree  rate  in  $R  =  13.21%  -­‐  1.90%  =  11.31%    

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Risk  free  Rates:  By  Currency  –  September  2014  20!

Default  Free  Governments   Governments  with  Default  Risk  

   Government  Bond  rate  

Risk  free  rates  

Default  Spread  

Riskfree  rate      

Government  Bond  rate  

Risk  free  rate  

Default  Spread  

Riskfree  rate  

Japanese  Yen   0.51%   0.51%   0.00%   0.51%   Brazilian  $R   11.43%   9.43%   2.00%   9.43%  Swiss  Franc   0.55%   0.55%   0.00%   0.55%   Bri;sh  Pound   2.48%   2.18%   0.30%   2.18%  Euro   1.00%   1.00%   0.00%   1.00%   Chilean  Peso   4.57%   3.77%   0.80%   3.77%  Danish  Krone   1.27%   1.27%   0.00%   1.27%   Chinese  Yuan   4.33%   3.53%   0.80%   3.53%  Singapore  $   2.39%   2.39%   0.00%   2.39%   Colombian  Peso   6.55%   4.30%   2.25%   4.30%  Swedish  Krona   1.34%   1.34%   0.00%   1.34%   Czech  Koruna   1.21%   0.26%   0.95%   0.26%  US  $   2.50%   2.50%   0.00%   2.50%   Hong  Kong  $   1.97%   1.67%   0.30%   1.67%  Canadian  $   2.17%   2.17%   0.00%   2.17%   Indian  Rupee   8.52%   6.27%   2.25%   6.27%  Norwegian  Krone   2.38%   2.38%   0.00%   2.38%   Indonesian  Rupiah   8.04%   5.79%   2.25%   5.79%  Australian  $   3.60%   3.60%   0.00%   3.60%   Israeli  Shekel   2.49%   1.54%   0.95%   1.54%  

Korean  Won   3.07%   2.27%   0.80%   2.27%  Malaysia  Ringgit   3.98%   2.68%   1.30%   2.68%  Mexican  Peso   5.88%   4.28%   1.60%   4.28%  Nigerian  Naira   12.03%   8.43%   3.60%   8.43%  Pakistani  Rupee   13.33%   5.33%   8.00%   5.33%  Phillipine  Peso   4.41%   1.66%   2.75%   1.66%  Polish  Zloty   2.99%   1.89%   1.10%   1.89%  Russian  Ruble   9.54%   7.84%   1.70%   7.84%  South  African  Rand   7.86%   6.16%   1.70%   6.16%  Taiwanese  $   1.71%   0.91%   0.80%   0.91%  Thai  Baht   3.49%   1.79%   1.70%   1.79%  Turkish  Lira   9.00%   6.75%   2.25%   6.75%  Venezuelan  Bolivar   10.05%   5.55%   4.50%   5.55%  

What is the risk free rate in!a.  Saudi Riyal?!b.  UAE Dirham?!c.  Quatari Riyal?!

21!

Risk  free  Rate:  Despera;on  Time?  

¨  It  is  en;rely  possible  that  you  may  be  unable  to  find  a  government  bond  issued  in  the  local  currency  (that  is  traded)  or  that  you  do  not  trust  the  government  bond  rate  as  a  fair  market  interest  rate.  There  are  two  ways  you  can  get  to  a  risk  free  rate,  in  this  case.  

1.  Build  up  approach:  The  risk  free  rate  in  any  currency  can  be  wriren  as  the  sum  of  two  variables:  

Risk  free  rate  =  Expected  Infla;on  in  currency  +  Expected  real  interest  rate  The  expected  real  interest  rate  can  be  computed  in  one  of  two  ways:  from  the  US  TIPs  rate  or  set  equal  to  real  growth  in  the  economy.  Thus,  if  the  expected  infla;on  rate  in  a  country  is  expected  to  be  15%  and  the  TIPs  rate  is  1%,  the  risk  free  rate  is  16%.  

2.  US  $  rate  &  Differen;al  Infla;on:  Alterna;vely,  you  can  scale  up  the  US  $  risk  free  rate  by  the  differen;al  infla;on  between  the  US  $  and  the  currency  in  ques;on:  

Risk  free  rateCurrency=    Thus,  if  the  US  $  risk  free  rate  is  3.04%,  the  infla;on  rate  in  the  foreign  currency  is  15%  and  the  infla;on  rate  in  US  $  is  2%,  the  foreign  currency  risk  free  rate  is  as  follows:  Risk  free  rate  =     1.0304 !.!"

!.!" − 1!=!16.17%!

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Black #: Total ERP Red #: Country risk premium AVG: GDP weighted average

ERP

: Jan

201

4!

Angola 10.40% 5.40% Benin 13.25% 8.25% Botswana 6.28% 1.28% Burkina Faso 13.25% 8.25% Cameroon 13.25% 8.25% Cape Verde 13.25% 8.25% DR Congo 14.75% 9.75% Egypt 16.25% 11.25% Gabon 10.40% 5.40% Ghana 11.75% 6.75% Kenya 11.75% 6.75% Morocco 8.75% 3.75% Mozambique 11.75% 6.75% Namibia 8.30% 3.30% Nigeria 10.40% 5.40% Rep Congo 10.40% 5.40% Rwanda 13.25% 8.25% Senegal 11.75% 6.75% South Africa 7.40% 2.40% Tunisia 10.40% 5.40% Uganda 11.75% 6.75% Zambia 11.75% 6.75% Africa 10.04% 5.04%

Bangladesh 10.40% 5.40% Cambodia 13.25% 8.25% China 5.90% 0.90% Fiji 11.75% 6.75% Hong Kong 5.60% 0.60% India 8.30% 3.30% Indonesia 8.30% 3.30% Japan 5.90% 0.90% Korea 5.90% 0.90% Macao 5.90% 0.90% Malaysia 6.80% 1.80% Mauritius 7.40% 2.40% Mongolia 11.75% 6.75% Pakistan 16.25% 11.25% Papua New Guinea 11.75% 6.75% Philippines 8.30% 3.30% Singapore 5.00% 0.00% Sri Lanka 11.75% 6.75% Taiwan 5.90% 0.90% Thailand 7.40% 2.40% Vietnam 13.25% 8.25% Asia 6.51% 1.51%

Australia 5.00% 0.00% Cook Islands 11.75% 6.75% New Zealand 5.00% 0.00% Australia & New Zealand 5.00% 0.00%

Argentina 14.75% 9.75% Belize 18.50% 13.50% Bolivia 10.40% 5.40% Brazil 7.85% 2.85% Chile 5.90% 0.90% Colombia 8.30% 3.30% Costa Rica 8.30% 3.30% Ecuador 16.25% 11.25% El Salvador 10.40% 5.40% Guatemala 8.75% 3.75% Honduras 13.25% 8.25% Mexico 7.40% 2.40% Nicaragua 14.75% 9.75% Panama 7.85% 2.85% Paraguay 10.40% 5.40% Peru 7.85% 2.85% Suriname 10.40% 5.40% Uruguay 8.30% 3.30% Venezuela 16.25% 11.25% Latin America 8.62% 3.62%

Albania 11.75% 6.75% Armenia 9.50% 4.50% Azerbaijan 8.30% 3.30% Belarus 14.75% 9.75% Bosnia and Herzegovina 14.75% 9.75% Bulgaria 7.85% 2.85% Croatia 8.75% 3.75% Czech Republic 6.05% 1.05% Estonia 6.05% 1.05% Georgia 10.40% 5.40% Hungary 8.75% 3.75% Kazakhstan 7.85% 2.85% Latvia 7.85% 2.85% Lithuania 7.40% 2.40% Macedonia 10.40% 5.40% Moldova 14.75% 9.75% Montenegro 10.40% 5.40% Poland 6.28% 1.28% Romania 8.30% 3.30% Russia 7.40% 2.40% Serbia 11.75% 6.75% Slovakia 6.28% 1.28% Slovenia 8.75% 3.75% Ukraine 16.25% 11.25% E. Europe & Russia 7.96% 2.96%

Abu Dhabi 5.75% 0.75% Bahrain 7.85% 2.85% Israel 6.05% 1.05% Jordan 11.75% 6.75% Kuwait 5.75% 0.75% Lebanon 11.75% 6.75% Oman 6.05% 1.05% Qatar 5.75% 0.75% Saudi Arabia 5.90% 0.90% United Arab Emirates 5.75% 0.75% Middle East 6.14% 1.14%

Canada 5.00% 0.00% United States of America 5.00% 0.00% North America 5.00% 0.00%

Andorra 6.80% 1.80% Liechtenstein 5.00% 0.00% Austria 5.00% 0.00% Luxembourg 5.00% 0.00% Belgium 5.90% 0.90% Malta 6.80% 1.80% Cyprus 20.00% 15.00% Netherlands 5.00% 0.00% Denmark 5.00% 0.00% Norway 5.00% 0.00% Finland 5.00% 0.00% Portugal 10.40% 5.40% France 5.60% 0.60% Spain 8.30% 3.30% Germany 5.00% 0.00% Sweden 5.00% 0.00% Greece 20.00% 15.00% Switzerland 5.00% 0.00% Iceland 8.30% 3.30% Turkey 8.30% 3.30% Ireland 8.75% 3.75% United Kingdom 5.60% 0.60% Italy 7.85% 2.85% Western Europe 6.29% 1.29%

22!

Regression  beta  is  0.422  

Intercept  in  %  0.057%  

Adj  Beta  =  (2/3)(0.422)  +  (1/3)  (1)  =  0.614  

R  squared  (decimals)  =  21.5%  

Std  error  of  beta  =  0.08  67%  confidence:    0.34  (=0.42-­‐0.08)  to  0.50  (=0.42+0.08)  95%  confidence:  0.26  (=0.42-­‐2*0.08)  to  0.58  (=0.42+2*0.08)  

If  annualized  riskfree  rate  during  period  was  1.5%,  Jensen’s  alpha  =  0.345%  -­‐  (1.5%/52)*(1-­‐2.147)  =  0.378%  

Using  a  6%  ERP  for  mature  markets,  Expected  Return  =  Riskfree  rate  +  Raw  Beta  (ERP)  

 =  1.87%  +  0.422  (6%)  23!

24!

The  best  R-­‐squared  ever?  24!

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27!

What  sector  is  your  firm  in?  Bloomberg  sector  category  

Read  the  descrip;on  and  make  your  own  judgment  

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30!

Interest  coverage  ra;os  

Interest  coverage  ra;o  =  Opera;ng  profit/  Interest  expense        =  17,741/1,441  =  12.10  

30!

Synthe;c  Ra;ngs  and  Default  Spreads  

Market cap > $ 5 billion" Market cap < $ 5 billion"

31!

32!

Marginal  Tax  Rate  by  Country  32!

Market  value  of  equity  =  66,452.45  M   BV  of  debt  =  Total  Debt  =  $28,360  M    

With  a  pre-­‐tax  cost  of  debt  of  3%  MV  of  debt  =  1,441  (PV  of  annuity,  3  years,  3%)    +  28,360/  (1.03)3  =  $  30,029  M  

PV  of  operaEng  leases  at  3%  767/1.03  +519/1.032  +382/1.033  +300/1.034  +202/1.035  +259.5/1.036  +259.5/1.037  =  2,187          

33!

34!

35!

Pre-­‐tax  Return  on  capital  =  Opera;ng  Income/    (BV  of  Debt  last  year  +  BV  of  Equity  last  year  –Cash  last  year)  =  17741/(22,623+  55,734-­‐6,361)  =  24.64%    Axer-­‐tax  Return  on  capital  =  Pre-­‐tax  Return  on  capital  (1-­‐  tax  rate)  =  24.64%  (1-­‐.4603)  =  .1330  or  13.30%  Tax  rate  used:  Effec;ve  tax  rate  (from  this  page)  36!

37!

38!

39!

Return  Spreads  Globally….  

0.00%  

10.00%  

20.00%  

30.00%  

40.00%  

50.00%  

60.00%  

70.00%  

80.00%  

Australia,  NZ  &  Canada  

Europe   Emerging  Markets  

Japan   US   Global  

%  of  fi

rms  in  the  grou

p  

ROIC  versus  Cost  of  Capital:  A  Global  Assessment  for  2013  

ROC  more  than  5%  below  cost  of  capital  

ROC  between  2%  and  5%  below  cost  of  capital  

ROC  between  2%  and  0%  below  cost  of  capital  

ROC  between  0  and  2%  more  than  cost  of  capital  

ROC  between  2%  and  5%  above  cost  of  capital  

ROC  more  than  5%  above  cost  of  capital  

39!

40!

41!

42!

Dividend  yield  and  payout  42!

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Net  Income            12,345  +  Deprecn  &  Amortzn    +      7,742      +  Chg  in  non-­‐cash  WC    +      1,748  +  Cap  Ex    -­‐    14,642  +  Inc  (Dec)  in  ST  Debt  +                    0  +  Increase  in  LT  Debt  +      5,794  -­‐    Decrease  in  LT  Debt  -­‐                    0  =  FCFE    =    9,491  M      Dividends  Paid  -­‐    3,531  Decrease  capital  stock  -­‐11,623    Dividends  +  Buybacks  -­‐15,154  

EBITDA  –  Opera;ng  Income  =  Deprecia;on  &  Amor;za;on  25,443  –  17,741  =  7,742  M    

Opera;ng  Income        17,741  -­‐  Taxes    =  17741*.4603  =  -­‐      8,166  +  Deprecn  &  Amortzn    +      7,742      +  Chg  in  non-­‐cash  WC    +      1,748  +  Cap  Ex    -­‐    14,642  =  FCFF    =    4,423  M  

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Post-­‐class  Analysis  

¨  Now  that  you  have  the  numbers  for  your  company,  you  should  be  in  a  posi;on  to  make  an  assessment  of  where  your  company  stands  right  now,  what  it  does  well,  what  it  does  badly  and  what  you  would  change  about  it.  

¨  Your  final  project  will  therefore  contain  eight  parts  and  an  op;onal  one,  if  you  are  so  inclined:  I.  Stockholder  Analysis:  Who  has  the  power  and  what  are  the  poten;al  conflicts  of  interest?  II.  Risk  and  Return:  How  risky  is  your  firm  and  what  are  its  hurdle  rates?  III.  Investments:  How  good  are  exis;ng  investments  and  what  is  the  poten;al  for  the  future?  IV.  Capital  Structure  Choices:  What  are  the  current  financing  choices?  V.  Op;mal  Financing:  What  is  the  op;mal  mix  of  debt  and  equity  for  the  firm?  VI.  Financing  Changes:  Should  firm  move  to  op;mal  and  what  type  of  debt  should  it  use?  VII.  Dividend  Policy:  How  much  and  how  does  the  firm  return  cash  to  stockholders?  VIII.  Dividend  Assessment:  Should  the  firm  return  more  or  less  cash  to  stockholders?  IX:  Valua;on  (op;onal):  What  value  would  you  arach  to  the  firm  and  its  equity?  

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